Hedge fund firm Two Sigma just started selling a risk analysis tool, and it shows how secretive quants are now looking to make money sharing their tech

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Hedge fund firm Two Sigma just started selling a risk analysis tool, and it shows how secretive quants are now looking to make money sharing their tech

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  • Two Sigma has started selling software geared towards helping allocators of assets, such as pensions, endowments, and family offices, get forward-looking insights into the potential risks in their portfolios.
  • $60 billion Two Sigma is the latest hedge fund firm to spin off its expertise into a product or service it can sell.
  • Jake Dwyer, general manager of Venn, told Business Insider that it's a massive addressable market, with over 30,000 firms managing more than $70 trillion in assets.
  • Click here for more BI Prime stories.

One of the world's preeminent quantitative hedge fund firms is spinning out its data expertise into a product aimed at helping others better understand their investment allocations.

Two Sigma has just announced the wide release of Venn - software geared towards helping allocators of assets, such as pensions, endowments, and family offices, get forward-looking insights into the potential risks in their portfolio through data analysis.

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Jake Dwyer, general manager of Venn, told Business Insider it's a massive addressable market, with over 30,000 firms managing more than $70 trillion in assets.

And even though it's the first time Two Sigma has marketed an investment management product to outside clients - a trend that is increasing popular amongst hedge funds - Dwyer said it represents a "sizeable market opportunity" and a "really meaningful driver" for the $60 billion firm.

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"We think this has the potential to be a significant business for us," Dwyer said. "Our co-chairs and founders are not interested in entering new markets that we don't feel like we have the opportunity to have a significant impact or that has the opportunity to really move the needle for Two Sigma as a whole."

Hedge funds are increasingly looking to diversify their revenue

Venn is the latest in a long line of products and services hedge funds have started pitching as they search for additional revenue streams. From the high cost of data to the recent low-fee environment and uninspiring returns, money managers' profit margin has continued to erode.

As a result, investors have spun out offerings based on their areas of expertise. Examples include Winton Group and Brevan Howard creating businesses around artificial intelligence and data collection.

Dwyer said Venn's launch doesn't come out of concerns over changing market conditions for hedge funds, adding that the strength of the core investment business allowed Two Sigma to push into new growth areas.

"We look at this as one of the many big bets that we are making at any given time," he said. "This is just another big opportunity that we see that we can enter into a space that our expertise plays well in."

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From internal tool to business opportunity

Venn is the product of a push to meet current clients' evolving needs, as is often the case. Investors in the hedge fund wanted to take a more quantitative approach to their asset allocation process, Dwyer said.

Word of the offering began to spread to non-investors that were interested in the same capabilities. By early 2019, Dwyer said, the firm recognized there was a potential commercial opportunity amongst asset allocators that were resource constrained and looking for a better way to manage their investments.

"When you look at the software tools that they are leveraging to manage these massive pools of capital, it's just not, at all up to the same standards as people who are managing much smaller pools of capital on the asset management side," Dwyer said.

Over the summer Two Sigma launched an invite-only version of the product. It attracted more than 200 investors, including Brown University and Prudential Financial, representing more than $5 trillion in assets under management.

Customers can access a less-customizable form of Venn for free, but Dwyer said more than half of those that have signed up have opted for the subscription-based version.

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The immediate focus of Venn is large asset allocators, but Dwyer said some fellow hedge funds have shown interest in the product. It's a tricky dynamic, as Two Sigma would be selling a product directly into some of its perceived competitors.

Dwyer said the firm has taken all the necessary precautions to ensure data from clients that is seen and handled by the Venn team can't be leaked back to the investing arm of the firm. The Venn team sits in a separate, walled-off environment with the software running on an independent public cloud.

"The was a really important thing for us to establish early and develop that trust with people," Dwyer said. "To ensure that people are confident that the data they're providing us - since we're known as a data-focused company - wasn't going to be used for any other purposes."

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